Interest rates to be reserved for later in the year

By James Wells

SYDNEY: At 9.30am tomorrow, the Reserve Bank of Australia (RBA) is expected to announce that interest rates will remain unchanged in July, but some analysts have predicted a 100 per cent likelihood of a change prior to Christmas, with some expecting the change next month.

Last month the RBA increased the official cash rates in May to 5.75 per cent, adding about $14 a week to the average mortgage, which has been compensated by $6.4 billion of personal income tax cuts, effective 1 July.

The RBA faces conflicting market messages with statistics released yesterday stating that building approvals rose, while retail sales figures fell.

According to financial analysts, inflation is above the bank’s target range at 3.1 per cent, but with volatile petrol and fruit and vegetable prices excluded, it sits at the lower end of expectations which if exceeded are likely to trigger a rate rise. Other statistics show unemployment is continuing to fall, while business investment is rising and consumer spending is recovering.

A Sydney based electrical retail analyst today told Current.com.au that sales of whitegoods in New South Wales have decreased by up to 20 per cent.

TD Securities’ Stephen Koukoulas told the Sydney Morning Herald that with tax cuts arriving in pay packets, “it will be a little provocative for the RBA to hike interest rates just as you get a tax reprieve”.

Koukoulas said the 90-day bank bill futures, which is used by the market to measure interest rate fluctuation, has not shown an inidication for a rate rise in the short term, but it has factored in a rate rise by the end of the year.

But not every analyst is forecasting a rise in interest rates.

UBS chief economist, Scott Haslem, told the ABC he expects interest rates will remin on hold for the rest of the year.

”We do expect over the next few months that we will see a slower pace of retail spending, and that core inflation won’t move higher than the RBA’s forecast two-and-three-quarter per cent,” Haslem said.

“When they sit down in August, the outlook with flat, possibly down commodity prices and a much more subdued outlook is one that’s probably a little less inflationary than when they sat down in May."

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